Quick Takes: How much margin? The 2023 edition
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Ali Curi: Hi everyone and welcome to ION Markets Quick Takes. I'm Ali Curi and every week, along with my guests Amir Khwaja and Chris Barnes, we take a quick dive into the headlines on the Clarus blog. Let's get started. 

Amir Khwaja: Hi Ali. 

Ali Curi: Hi Amir. Hi Chris. 

Chris Barnes: Hey Ali, how are you doing? 

Ali Curi: I'm doing great. Welcome back to Quick Takes.

Chris, let's start with you. What's your Quick Take for this week? Which headline from the ClarusFT blog would you like to discuss? 

Chris Barnes: All right, Ali, uh, this week I'm going to talk about a headline that can actually be pronounced or emphasized in a number of different ways. So I could say, "How _much_ margin, the 2023 edition!?" or I could say, "How much margin, the 2023 edition?" There are a lot of ways of reading it. And there's a lot of ways of interpreting the numbers as well. In a nutshell, the blog is really about the ISDA margin survey, which is done once a year. It's the only insight that we have into how much uncleared initial margin is held in the market. But what it really tries to do is talk about margin from a holistic viewpoint. And the reason we do that is way back when, so I'm just reading the blog now, in 2012, ISDA came out with what seemed at the time like a crazy estimate that if the industry went ahead with the uncleared margin rules as drafted, there would be an extra $800 billion dollars of initial margin posted as a direct result.

And I don't think that Amir and I were alone in reading that and just going, "That is absolute hyperbole. There is no way that the industry is suddenly going to start funding another $800 billion dollars of initial margin." If that really is how much it's going to take to fund uncleared markets, we'll just see a lot more clearing, a lot more use of futures, a lot more netting, a lot more use of cross margining. There's no way that the numbers will gross up in that way. So I think ever since, I'm just having a look, 2017, we've tried to benchmark that $800 billion number, saying, "Is this really the path that the industry has chosen to take?"

And I would really like everybody to read the blog in order because it steps through the numbers, but really as like a headline that is the estimate in 2012 was surprisingly accurate. It really speaks to how difficult it is in our industry to make people change. If margin was the only driving factor of why you trade a future, why you trade cleared, et cetera, then there is no way that we as an industry would have ended up in a situation whereby nearly a trillion dollars in initial margin has been added as an extra cost of business in such a short period of time.

This has essentially happened in like seven years. And so I still find this blog, which has now become a once a year benchmarking exercise for us, a really, really interesting process to go through. The reason that I think this blog is not just, "This is the ISDA margin survey. These are the numbers that ISDA have given us," is that we look at all three options. So we say, this is the number that ISDA has given us for the UNCLEARED markets. This is the only source of this data. And then we go to CCPView and we say, look, we also have the data for interest rate derivatives that are cleared, generally cleared swaps across credit FX rates as well. And we have how much initial margin is posted against futures as well. So we can actually look at the different behaviors because in many ways a lot of the blogs that we've looked at, we've said, look, clearing has increased not necessarily as a result of just the currencies that are mandated, but just having all of your dollar swaps and all of your Euro swaps in clearing makes it cheaper to trade the smaller currencies in clearing as well because of the netting benefit. Equally uncleared margin rules could have acted as an economic mandate to clear. You could have put that Delta, which you're keeping uncleared into a clearing house using similar products benefited from the netting benefited from less IM.

And so your activity in uncleared markets could have reduced. I have to say, that's not what we see. Uncleared markets, the IM continues to go up and basically the share of total IM that is being caused by uncleared markets just seems to go up and up each year. 2023 was, let's say, the most painful experience from that perspective.

Largely, I think as a result of the recalibration of ISDA SIMM. ISDA SIMM saw its risk weights go higher by a lot. We did a podcast last year on the change to ISDA SIMM version 2.6. And as a result of that recalibration, uncleared margin generally has gone up. But this is really the first margin year whereby we haven't had a lot more counterparties captured by uncleared margin.

So it's pretty clear that either there's been a whole lot more risk taking in uncleared markets, which has resulted in more uncleared margin or it's as a direct result of the recalibration of the results. Now I've intentionally tried to avoid talking about numbers because it makes the podcast a bit dull, and the numbers are on the blog.

I'll just say that the numbers are really, really big. My first tagline states total initial margin across the industry now stands at $1.4 trillion dollars. Initial margins, again, across the industry, so across cleared and across uncleared have increased by basically a trillion dollars since 2016. So eight years, you've had nearly trillion dollar increase in initial margin.

On that note, I'll pass over to Amir cause we have some tools that really allow you to analyze that. 

Amir Khwaja: Great, Chris, thanks for that. Again, I think it's very interesting. Looking at your charts in 2016, $400 billion, total IM at $1.4 trillion. So I think huge increases. And I think, one reason why we are keen on these macro numbers, we're interested in trends that affect the industry.

Same time, we look at more at a micro level and we have tools in Clarus and CHARM that can calculate these numbers, both for unclear derivatives, so FX options, equity TRS type swaps for clear derivatives, like cleared swaps. And also now that we're part of ION Markets, we also have access to lots of features and options, margin calculators.

So that means that firms can calculate these things. And they can calculate them as the market moves. Most of these methodologies are based on a value risk type methodology, whether it's uncleared or cleared or futures. So really they depend on historical, or volatility in the recent period that will increase margin or not, and new trades or positions you take on. So it's really, we focus a lot on the actual methodologies in these markets, how margins change, how positions change, right? And what you should be doing, to have easy to use tools in the front office, the middle office, back office to be able to optimize between these pots of margin.

But I think, it's a testament to the derivative market has grown immensely in those seven years in terms of risk, I assume, that wasn't prior to 2016 being adequately collateralized in some sense. So anyway, so I guess you just want to talk about CHARM. Understanding margin at a macro, micro level is important.

Having tools to recalculate with different portfolios and units is important. And the more that can be done intraday real time with "what ifs," the more insight we have to look at these numbers, why they're changing, how they can be improved. 

Chris Barnes: So coupled with the fact that CHARM analyzes your margin, coupled with the fact that the data and the transparency is out there, nobody can be surprised that their margin requirements to run a derivatives business have gone up by 350 percent in eight years.

When you couple that with the idea that rates have gone up by 5 percent over the same time period, like the costs of running a derivatives business must be so much higher in 2024 than they were back in 2016. It can't be a positive thing for our customers, for market participants and ways of sourcing trading liquidity, ultimately.

On that note, Ali, I think we'll leave it there for this week. 

Ali Curi: Thank you, Chris. And please, share with us again the title of your blog post. 

Chris Barnes: It maybe should be called "How Much Bleep Margin!?," I'm not sure, but the actual title is "How Much Margin, The 2023 Edition." 

Ali Curi: Great, that works.

Amir Khwaja, Chris Barnes.

Thank you both for sharing your Quick Takes. Let's do it again next week.

Amir Khwaja: Thanks, Ali. 

Chris Barnes: Thanks, Ali. 

Ali Curi: And that's our episode for today. You can read more about these topics on the Clarus blog, and you can follow ION Markets on X and on LinkedIn. Thank you for joining us.